Shares in Ford Motor Company (NYSE:F) now trade for roughly the cost of a gallon of diesel. Is this the time to load up on F stock? Oxford Club’s Horacio Marquez gives his take on the future of the automaker and where investors should best look for profits.

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Ford Motor Company’s share price has defined the word volatile in recent months. Should investors take advantage of the bargain rates, especially now that the company is selling an additional 500 million in new shares to make up for debt incurred by its financial arm?

Ford expects to have an electric car on the market by 2014. Toyota is working on an electric car to have ready by 2010. Even GM has its Chevrolet Volt that it thinks it’s going to have 100,000 cars on the road by 2012. How come Ford has dropped so far behind in this kind of technology?

Horacio Marquez: You’re right in your assessment, Laura. It’s a travesty to see Ford in such a bad product situation. But the reality is that Ford has lacked the funds to do the investment. At the same time, Ford has been hit by the situation in the United States where you’ve had a few very significant negative effects that have put a company that was already in financial straits in an even more precarious situation. Of course, I’m referring to the credit crunch in the financial system. Then there’s the housing bubble with its very significant negative wealth effect on consumers who no longer can refinance or use their houses as ATMs to buy new cars and at the same time. Then, you’ve had the tremendous spike in oil prices that went from 80 to 150 in just as few months.

Laura Cadden: All kind of combined against it.

Horacio Marquez: Exactly. All of those effects have been very negative for Ford and the Big Three. Add the humongous employee costs because of their overly generous pay packages and benefit packages that are basically a legacy of the times where the Big Three led the world. But as you know, the rest of the world has already figured out how to make very good cars starting with initially Germany, then moving over to Japan. These days you get nice cars, very nice, very competitive cars made in South Korea and Brazil, Mexico and many other countries. The Chinese are entering the market. So you cannot sustain those tremendous pay packages.

Laura Cadden: Ford’s share price is getting near the cost of a gallon of gas. Do you think this company will survive this?

Horacio Marquez: Well, it’s a race against time. Ford has recently sold off their Land Rover and Jaguar divisions and raised significant cash. Some people are saying that they soon might sell Volvo in order to make some more money. Ford is making money outside of the United States. They’re making very good money in emerging markets and even in other places outside of the United States, they’re making good money.

But the drag in the U.S. is tremendous. That has caused them to greatly underperform, especially because 60 percent of the sales in the U.S. are light trucks. Those trucks heavily depend on the price of gasoline. As the price of gasoline goes up, the sales of Ford light trucks literally plummet. The word in the last few months is that dealers — not only in Ford, but in any other brands — have had a very hard time offloading any type of sport utility vehicles or gas guzzlers of any type. That puts the company in a very bad situation.

Under the new leadership of Alan Mulally, they have been cutting costs. Alan Mulally comes from Boeing and is credited with turning around Boeing in a very good way. They have reached an agreement with the unions. If that is ratified — that will take another year or two — then cost savings (offloading their pension and health benefits to the United Auto Workers,) will bring Ford on par with its foreign competitors. I think Ford will be able to thrive.

But the question remains: Will Ford go bankrupt between now and 2010? It depends on the price of oil, it depends on the evolution of the U.S. housing market and the U.S. economy. There’s just too many questions for me to be able to justify an investment in Ford, other than by saying it’s extremely cheap and it’s a highly speculative play.

So I would not make a sizable investment in Ford right now. I would make a very small investment in the stock if I want to play a very highly speculative play with a huge upside potential and the downside of maybe losing your entire investment. Because there is a possibility of a bankruptcy not right now, but maybe a year from now if the situation doesn’t improve dramatically.

Laura Cadden: So very risky investment for shares. Is there other ways you think that one could play Ford? Should you consider calls? Should one look to puts?

Horacio Marquez: If you believe the company is going into bankruptcy you could buy the puts, but then again that’s not a bet that I’m willing to make either because again, Alan Mulally is taking the steps necessary to clean up the company, to keep bringing new, fuel efficient vehicles. Ford’s vehicles, in the J.D. Power & Associate rankings show up very, very well in terms of quality in comparison to the foreign imports. Ford needs to keep improving its presence in the mind of the consumers because their quality is already there in their newer models. My preferred way of playing it is to buy convertible debt of Ford. Why? Because it’s already trading at a huge discount to par and you’re getting a nice interest. Suppose the company goes into bankruptcy. In a bankruptcy, you’re going to end up owning the company.

Your shares are going to be become equity and you’re going to, over the long-term be able to capture the upside of a new restructured Ford.

by Laura Cadden

Source: Contrarian Investing: Is it Time to Buy Ford Motor Co. (F) at the Bottom?